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Proposal for STO legal structure in Europe

This post was first published on our Medium channel. Click here to read the full post. 

Disclaimer: This post does not constitute legal advice and does not establish an attorney-client relationship. Any legal structure of any public offering of securities depends on the jurisdiction where the company (SPV) is registered. Therefore, we recommend you to consult a local lawyer about the possibilities of the jurisdiction where you want to register your SPV (special purpose vehicle). TokenizEU has competence either in-house or via partners in Estonia, Liechtenstein, Luxembourg, Malta, Netherlands and in Switzerland.

Many of the companies planning on doing an STO have to decide on the type of security they’re going to issue. Mostly, it’s a question of whether you’re going to tokenise shares (equity token) or a debt instrument (a bond-type token). Due to the fact that regulations haven’t really caught up with the blockchain technology, there are several (regulatory) technicalities and nuances that come up when you actually think through the (regulatory) details of the offering (dependent on the jurisdiction). For example, some countries allow the management of the company to keep the registry of all the shareholders, while some require registration (via notary) of the shareholders in the business registry.

For example, let’s say you want to tokenise a private limited company in Estonia. PLC is a hugely popular type of legal entity for both Estonians and Estonian e-residents. In theory, you can tokenise a private limited company shares in Estonia. However, once the token holders would like to trade their tokens, then it’s a notarised transaction — every time you want to sell a share (equity token) or buy a share (equity token) in the Estonian PLC, you would need to go to the notary. This, as you can already understand, is not a feasible option. We have a solution to this problem, but let’s quickly talk about tokenised bonds as well.

Tokenised bonds are easier to issue and trade, and we actually think that the bond market is the one that STOs will disrupt first. Bonds are registered in the depositories (central securities depository, credit institutions, investment firms). Bonds aren’t very popular, at least not in the retail market, and most people wouldn’t know how to buy one even if they wanted to. STOs will simplify this considerably.

If the bond isn’t a familiar term for you, here’s a definition from Investopedia:

“Most simply, bonds represent debt obligations — and therefore are a form of borrowing. If a company issues a bond, the money they receive in return is a loan and must be repaid over time. Just like the mortgage on a home or a credit card payment, the repayment of the loan also entails periodic interest to be paid to the lenders. The buyers of bonds, then, are essentially lenders. For example, if you have ever bought a government savings bond, you became a lender to the government. “

Bond is still security and the issuer has to follow all the related laws in place for issuing securities. Bond can be structured in a way that the payments are tied to the company performance and revenue, i.e it does not have to be a fixed interest that you as an issuer will have to pay to the investors. Don’t forget though, the risks you are minimising for yourself are then bore by the investor, which in turn will lower the attractiveness of the offering and a chance of having a successful raise. Bond can be convertible, i.e the investors can, after 10 years, convert the bond into a specified amount of company shares.

Now, let’s come back to the workaround that I referred to. It’s called depositary receipts.